Pricing of temperature-based weather options for Turkey
AbstractWeather derivatives provide better risk management alternatives for industries, which are exposed to weather-based risks. Dynamic pricing of weather derivatives requires a suitable underlying temperature model. This paper is the first to model the average daily temperatures and prices of heating/cooling degree days (HDD/CDD) option contracts for Istanbul, Turkey. We model daily average temperatures using the mean-reverting Ornstein-Uhlenbeck (OU) process both with constant and time-varying mean reversion parameters. HDD/CDD options for Istanbul are priced using analytical approximation and Monte Carlo simulations. In most cases estimates are lower when time-varying mean reversion model is used. We also discuss several issues on the importance of weather derivatives markets for developing countries.
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Bibliographic InfoArticle provided by Bilgesel Yayincilik in its journal İktisat İşletme ve Finans.
Volume (Year): 26 (2011)
Issue (Month): 309 ()
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Web page: http://iif.com.tr
Weather Contracts; Temperature Modelling; Monte Carlo Simulation; HDD/CDD Options;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
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- Ahmet Goncu & Mehmet Oguz Karahan & Tolga Umut Kuzubas, 2013. "Forecasting Daily Residential Natural Gas Consumption: A Dynamic Temperature Modelling Approach," Working Papers 2013/11, Bogazici University, Department of Economics.
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